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The global pandemic has encouraged institutional and retail investors to take a greater interest in factoring environmental, social and governance (ESG) criteria into their portfolios. But since the war in Ukraine, the problems affecting the supply of raw materials and energy costs have shifted the focus within sustainable and responsible investment.

On the third anniversary of the launch of Banque de Luxembourg's Socially Responsible Funds mandate, Mélanie Mortier, Senior Portfolio Manager, considers the major challenges it has faced and the prospects for the coming months.

It is now just over three years since the Socially Responsible Funds mandate was launched. How have the markets and ESG-criteria equities performed over this period given that it has been marked by two major crises, health and geopolitical?

Historically speaking, three years is a short time. But these have been three exceptional years during which we have experienced a health crisis and a war at the edge of Europe, crises which, sadly, are not yet over.

Over this period *, global equities filtered according to ESG criteria (represented by the MSCI ACWI SRI Net Total Return Index) outperformed global equities (represented by the MSCI ACWI Net Total Return Index) by more than 12%. Their 'growth' and 'quality' bias was helpful, as was sector allocation, which favoured technology and healthcare. But this does not necessarily mean that integrating ESG criteria will always ensure outperformance over any time horizon.

In terms of sectors, 2021 saw outperformance in sectors considered ‘less ESG' such as energy. Certain themes have been particularly buoyant over the past three years, such as energy efficiency and electrification, as well as water and the environment in general.

Additionally, the ESG approach helps reduce certain risks by embracing themes that promote a better understanding of society, and also seize opportunities for innovative companies that are well positioned for the future.

Have you noticed any change in investor behaviour since the beginning of the health crisis?

Over the last two years, our clients have shown growing interest in an investment approach that considers both financial and non-financial criteria.

However, contrary to what some studies have suggested, this interest is not mainly confined to younger or female clients, it tends to be well spread across all our clients.

Has the war in Ukraine changed these trends or the appeal of particular sectors? Could the conflict have an impact on ESG investing?

The invasion of Russian forces in Ukraine is first and foremost a human crisis, but it raises many questions for investors, particularly in relation to ESG – environmental, social and governance issues.

 

Countries are having to rethink their energy policy, notably by being less dependent on Russia and relying more on local and renewable energy sources.

This has led to governments turning their attention from the fight against climate change to energy security and independence due to worries about energy prices and dependence on Russian gas.

It’s a trend that seems to be reflected in investor sentiment. This clearly raises the debate about some controversial sectors, such as defence and arms manufacturers, as well as coal.

While the invasion of Ukraine is likely to have a lasting impact on ESG investments in the form of investment restrictions, it could also help accelerate the energy transition, particularly in Europe, although this may take several years to feed through.

 

What is the most distinguishing aspect of your approach and vision of responsible investment?

Our world is changing: environmental and social concerns are becoming more and more important, which makes it all the more vital to give meaning and value to our actions. As a responsible bank, this is why we support our clients in a responsible approach to their investments, combining financial performance with social and environmental issues.

We invest in companies that promote the transition to tomorrow's world. This involves understanding all the parameters of a company in order to measure all its risks and we integrate environmental, social and governance criteria into our decision-making and investment analysis processes.

Do you see any new trends emerging?

Historically, the ‘E’ in ESG has always attracted the most attention from an investment perspective since it isn’t too difficult to measure and quantify greenhouse gas emissions and tonnes of waste etc.

Perhaps also because the effects of climate change have tended to proliferate and get closer to the Western investor, with many more climatic phenomena (floods, droughts, storms, etc.) encouraging a more thoughtful approach.

This is also reflected in the European regulation, the 'taxonomy', which clarifies which activities can be defined as sustainable. It is currently essentially a 'green taxonomy' and is initially focused on the environment and more specifically on mitigation and adaptation to climate change. Today, we are seeing an important trend in sustainable and responsible investment that is increasingly broadening towards its social aspect.

The taxonomy will progressively integrate social activities as well. Criteria such as respect for human rights and gender pay differences will be the subject of mandatory reporting in the future. However, as these social criteria are more difficult to measure or compare between companies, it may lead to more subjectivity.

The move towards greater social consideration is a very good thing. While the need to promote transition is less contested nowadays, the necessity for a 'socially just' transition is becoming more prevalent.

What are the biggest challenges for 2022?

The Sustainable Finance Disclosure Regulation (SFDR) was introduced in 2021. It aims to direct capital flows towards sustainable investments, improve transparency and integrate sustainability into risk management.

This has encouraged asset managers to focus on sustainable and responsible investment credentials and also be more transparent in their approach. The objective is ultimately to reduce the risk of 'greenwashing'.

Listed companies are now obliged to communicate transparently on certain ESG indicators (CO2 emissions, fair pay, etc.).

2022 is set to be an important year for sustainable and responsible investment in Europe. Among the various regulatory changes planned, banks will have to address the issue of the sustainability of their clients’ investments with them. This is bound to prompt some lively and impassioned discussions. The regulation is also aimed at improving transparency for investors, allowing them to better understand the non-financial aspects of their investments. Policy and regulation are thus contributing significantly to progress in sustainable and responsible investment in Europe.

* Period from 31/12/2018 to 29/04/2022 - source Bloomberg


If you would like more information, please contact

Melanie Mortier
Senior Portfolio Manager

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